Most Americans look at every paycheck they receive as putting them one step closer to retirement. With each check, a portion is withdrawn automatically or rerouted personally to a retirement plan. All the hard work and long hours today should result in a nice, easy retirement down the road, right?
Well, far too many individuals put their retirement plans on autopilot once they’re established and just assume there will be a nice nest egg waiting for them in the future. The reality is that all retirement portfolios need to be maintained and adjusted over time to ensure that your investing approaches are still taking you toward your long-term goals.
Review Your Plans Regularly
USNews recommends that individuals rebalance their portfolios once a year to avoid higher fees in certain investment categories and/or volatility in one particular sector. Rebalancing a portfolio ensures that your investments have not strayed off the path and become too heavily vested in one type of investment (stocks over mutual funds or bonds) or one particular sector (energy).
A well-balanced portfolio helps insulate your investments against volatility in the market and can lessen the impact of downward trends in the market overall. A financial advisor can help you analyze the status of your investments, go over your long-term goals, and rebalance your portfolio to meet those goals going forward. Investments in oil and energy are great performers in the long term., check out this interesting read from Dr. Kent Moors about energy stock movements.
Know Where You Stand
Fear should never rule your life, and that goes for your retirement savings too! It is not advisable to let fear of knowing exactly how much you’ve saved prevent you from looking in on your retirement plan on a regular basis. Only about 22% of 50-year-olds are actually on track to retire comfortably, and a lot of that stems from either fear or ignorance.
Some investors simply fail to look in on their investments, while others would rather assume they’re doing fine than face the fear of finding out they haven’t saved enough. However, at age 50 investors can start taking advantage of catch-up contributions, which allow them to increase the amount of money directed to a 401(k) each year to get back on track to a successful retirement.
Moreover, don’t be afraid to ask if you can contribute more. Quicken Loans has a great breakdown of the contribution amounts individuals can make, including some advisable targets to shoot for. As an example, in your 20s you should be putting away 7% of your income, with those figures rising to 10% in your 30s, 15% in your 40s, and 20% in your 50s.
If your budget has room for it, try to hit the maximum contribution figures. As of 2014, the maximum contribution to 401(k) funds were $17,500 for people under the age of 50, and $23,000 for those over the age of 50.
Checking In Can Save You Money!
Investment options come with a lot of different funds you can place your wealth into, and some have higher fees than others. By reviewing your investments from time to time, you might actually save money by rebalancing your investments away from funds with higher fees and reinvesting those dollars into funds with equal returns, but lower fees for management.
Repeat with Time, but Use Caution
There’s a delicate balance to strike when it comes to following your retirement plan. For all of the reasons covered above, it is important to check in on your investments once a year to ensure you aren’t paying outrageous fees on certain funds and ensure that your eggs haven’t settled into one basket. However, there is also such a thing as too much tinkering. Rebalancing is, after all, best done in moderation.
Too much adjusting and rebalancing of your retirement plan can actually prove harmful. First and foremost, your fear of short-term losses could result in missing out on long-term gains if you abandon a particular investment that has shown long-term stability but is in the midst of short-term instability. Just because your stock holdings start to rise faster than bonds doesn’t mean you should reallocate everything out of your bonds in favor of stocks.
Additionally, making constant changes to your portfolio can result in wasted money if you have a brokerage account and trade stocks. There is a transaction fee every time you buy and sell, and constantly reallocating assets can wipe out your gains as you pay those transaction fees.
In the end, it is best to check in on your retirement plans on a quarterly basis to see how they’re performing. Ask questions at this time of your financial advisor, and sit down at least once a year to review overall performance to see if there are areas of investment where adjustments can be made. Repeat this throughout your working days, and you’ll enjoy a more relaxing retirement.
Eleanor Cole shares her thoughts on a variety of important finance matters. She is a personal finance consultant with years of experience.